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Methode Electronics Rallies on Earnings and Revenue Surprise

Shares of Methode Electronics Inc. (NYSE:MEI) were up more than 13% on Thursday after the company released its first-quarter 2020 results before the opening bell. The company beat analyst expectations for both earnings per share and revenue.

This triggered a major surge in the company's stock, rising from about $28.40 per share to $32.10. The company has now outperformed analyst expectations on earnings on three occasions in the last four quarters and beaten revenue estimates twice.

Methode Electronics is a designer, manufacturer and marketer of component and subsystem devices employing radio remote control, electric, wireless and sensing technologies. It has engineering, manufacturing and sales operations in more than 35 locations in 14 countries.

According to its most recent full-year financial statement, the company generates about 50% of its revenue from the U.S., while nearly all the remaining half comes from China and Malta.

First-quarter highlights

Methode Electronics posted a 20.9% increase in net sales to $270.2 million. GAAP net income came in at $28.3 million, or 75 cents per share, beating analyst expectations by 7 cents. Sales from Grakon, which it acquired in 2018, came in at $54.3 million. They had a huge impact on the company's GAAP net income.

The gross margin for the year ticked up to 28.1% from 26.9% in the prior-year quarter. Management attributed this change primarily to Grakon's sales. But selling and administrative expenses also edged lower to 12%, down from 13.2% in the year-ago quarter.

The automotive segment's sales in China declined 22% due to a decrease in sensor product volume and pricing reductions. The impact of this decline was softened by a 17.1% sales increase in North America, which was boosted by sales from Grakon.

The industrials segment was the biggest beneficiary of Grakon's sales. The segment posted a 119% increase during the quarter, boosted by sales from the custom vehicle lighting manufacturer.

Methode Electronics also reaffirmed its revenue and earnings guidance for the year. It expects sales in the range of $1.130 billion to $1.170 billion and earnings in the range of $3.25 to $3.55 per share.

The company's revenue and earnings have experienced some turbulence over the last several years, but growth is expected in 2020. Depending on the company's ability to harness synergies from the acquisition of Grakon, things could get even better thereafter.

From a valuation perspective, shares of Methode Electronics currently trade at a trailing price-earnings ratio of about 13.7, which makes it look cheaper given the industry it operates in.

Its forward price-earnings ratio of 8.68 suggests the bottom line will improve in the next 12 months and the price-earnings to growth ratio (five-year expected) indicates the company is expected to experience steady growth in earnings per share for the next five years.

The company's growth story will also benefit as the automotive industry embraces more new technology.

In summary, shares of Methode Electronics spiked on Thursday, but based on the company's outlook, there is still room to run in the coming years.

Disclosure: No positions in the stocks mentioned.

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